Carriers Adjust Strategies to Address Reduced Freight Density
Freight density was one of the blessings of the mid 2000’s. The strong economy resulted in heavy volumes of freight. This allowed LTL carriers to run more direct schedules (from origin to destination) rather than move freight through break bulk terminals. Bypassing intermediate terminals means faster transit times, less handling, fewer miles driven, lower costs, less damages and less misloaded freight. Higher volumes of freight allow LTL carriers to be more selective in the type and quality of freight they handle and to increase yields.
During the same period, truckload carriers were in a good position to find backhaul loads, to run less empty and out of route miles and to keep their trucks and drivers moving. The freight recession followed by the economic downturn in late 2008, has forced many carriers to change business practices.
Despite encouraging words in recent days that the economy has hit bottom and is in the process of a turnaround, truck tonnage in the United States last month fell at its sharpest year-over-year rate yet in the economic downturn, plunging 13.6 percent based on data from the American Trucking Associations. According to Bob Costello, Chief Economist of the ATA, inventories relative to sales remain at high levels in much of the supply chain, especially in the manufacturing and wholesale industries. “Today, many new product orders can be fulfilled with current inventories, not new production, thus suppressing truck tonnage.”
This has placed pressure on trucking firms to adjust their strategies to bring them into line with the reduced freight volumes. In the case of the Roadway and Yellow divisions of YRCW, two of the largest U.S. based LTL carriers, the decision was made to integrate companies, to rationalize terminal networks and back office functions to purge costs. Other LTL carriers such as Con-Way and Vitran have also shuddered terminals to drive efficiencies. Based on their recently published second quarter results, all three carriers are experiencing big drops in revenue and earnings.
There are reports that some LTL carriers have stepped up their efforts to attract truckload traffic as a means of filling their trucks. Con-way recently announced that it has a new heavy volume LTL shipment pricing program in place to win back some of the business being lost to truckload carriers.
A recently-announced partnership between Milan Express, a Tennessee-based transportation services provider focusing on less-than-truckload (LTL), truckload, logistics, and warehousing, and New Century Transportation Inc. a New Jersey-based provider of LTL, regional and national truckload and temperature-controlled services, promises to offer shippers LTL services between the Midwest/Southeast region and the Northeast.
Dubbed the “Lightning Alliance,” officials at both companies said this partnership will feature world-class service between two of the country’s fastest-growing LTL carriers. David A. Kramer, president of Milan Express said the biggest benefit of the Lightning Alliance for existing Milan Express and New Century customers will be the ability to single-source more of their LTL needs through a primary regional provider they can count on. And he said that in addition to the convenience of being able to ship to a broader geography, the Lightning Alliance also provides very reliable and competitive 2-4 day transit times—depending upon the origin/destination—with the absolute minimal handling as a result of the Milan Express direct-load network working in tandem with the New Century Load-to-Deliver approach. “Minimal handling will result in error- and damage-free deliveries for our customers—all at a reasonable pricing,” noted Kramer. Time will tell if this strategy will take any market share from carriers that run these lanes direct.
As reported in a previous blog, some of the large national truckload carriers such as Werner and Schneider have been placing increased emphasis on regional truckload markets. These carriers are not abandoning the national markets but revising their long haul strategies. As an example, Werner, in its previous earnings report, noted that it “is deemphasizing the low asset return, solo driver solution” while seeking “to grow several other customer focused solutions for this market, such as using team drivers, engineered networks of relay trucks, third party brokerage carriers, power only with trucks provided by third party carriers and intermodal.”
Schneider National has also been rolling out its regional truckload business plan. On the heels of what the company said was the successful launch of a regional service in the West last January, the trucking company said it would offer regional service in the South-Central United States.
Just as LTL carriers are targeting truckload traffic, truckload carriers are going after large LTL shipments. Large LTL shipments are being defined as low as 2000 pounds and up. In addition, with fuel costs having dropped significantly as compared to the previous year, truckload carriers are going after loads that were converted to intermodal service. There are reports that shippers are more prepared to pay the small rate differential to enjoy the faster transit time associated with an over the road service.
For companies that cannot achieve the necessary density levels to sustain profitability, this is leading to trucks being parked, closures or sell-offs of businesses without the critical mass to remain profitable. As an example, Intermodal and logistics firm Pacer International, in order to stem steep losses, announced it will sell its heavy-haul Pacer Transport trucking business to Universal Truckload Services, the companies said last Monday. Universal's president and CEO, Don Cochran, said "we believe this acquisition will complement our truckload operations. We expect the asset-light business model to integrate nicely with our current operations and that we will be able to achieve efficiencies through this acquisition.”
What are the lessons of these changes for shippers? The next blog will address the potential impacts of these changes and outline some strategies that shippers should employ to protect the integrity of their freight programs.